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It is now just three days to publication of Bad Buying. So today, let’s move on to the second section of the book, all about fraud and corruption.

This was really enjoyable to write to be honest, even though we should be horrified at some of the stories. It was fascinating to see how frauds range from the mundane and often quite sad in terms of why the perpetraotrs do it ad the consequences, to those that have national or even international implications at the highest level.

One very ancient type of fraud is the cartel, although it is interesting to note that cartels weren’t always seen as a bad thing – and indeed, even today, we have OPEC, the oil cartel. But the medieval guilds were set up in part to operate as cartels and restrict the entrance of new suppliers into a market. But in modern times, we’ve seen illegal cartels in all sorts of areas, from international marine hose supplies (no, I’d never heard of marine hoses either), to construction firms in the UK public sector market, to brewers in India.

Many frauds relay on the buyer being able to ”fix” the supplier selection. In fact, that is a necessary condition in order to extract money though mechanism such as inflating invoices, over-billing or under-delivering. If a buyer and a supplier are going to collude – as they did in the case of a famous Sainsbury’s potato fraud – first of all, the buyer has to make sure that the supplier is chosen or wins the competitive process.

There are some rather ingenious examples of how this has been done. For instance, in the UK health service, a property manager manipulated the way that cost quotes were provided by suppliers to favour a relative’s decorating firm.  Bidders were asked to quote for different jobs, but work that actually was rarely needed was given a high weighting in the evaluation, and his relative bid low on those jobs, to score lots of points. But the jobs that actually would be frequently required were given a low weighting in the evaluation so his relative could bid high on those and still win the tender, knowing that he would then make significant money on that work. Very clever!  

That story points out one of the basic mitigations you can take to guard against fraud. Don’t leave any key parts of the process to a single individual, whether that is designing the evaluation process, marking the bids, negotiating prices… you can’t rule out collusion, but many of the examples I’ve seen are driven by just one personal internally. Putting a barrier in their way by taking away ability to act individually makes fraud much more difficult.

If that NHS example is small-scale, but interesting, at the other extreme we have the Petrobas / Odebrecht scandal in Latin America. At first that looked like a simple case of a large construction supplier paying bribes to win work from the Brazilian government-owned oil firm, Petrobas.  But as investigations went deeper, they exposed a vast network of corruption, with buyers paying over the odds to fund not just individual bribes but political donations too – and those political parties then appointing their stooges into positions in Petrobas where they could demand and get even more bribes!  Later, the related scandal spread to Peru, Mexico and further, leading to arrests and even the suicide of a leading politician accused of corruption.

That’s where the idea that a few more people knowing what’s going on breaks down. If corruption really becomes endemic in an organisation, it can be very hard to eliminate. Luckily, that doesn’t happen too often …

Anyway, there is still time (just) to order and get delivery on of the book on publication day – check out the links here. There is also a Bad Buying podcast now (“Peter Smith’s Bad Buying podcast”) and the first two episodes are available on most podcast platforms. There is even a Bad Buying playlist on Spotify (all my section titles in the book are also song titles …) It is a “diverse” playlist, as my daughter described it, but I’ll take that as a compliment!  You can make your own judgment on that.

Conflicts of interest lie behind many cases of procurement corruption and indeed other “corruption” in its widest sense. Often, these are not the highest profile or most serious examples – compared to envelopes of cash, swiss bank accounts and expensive prostitutes.  But if the practice of ignoring conflicts of interest (or covering them up) becomes pervasive in an organisation or a country, it can be corrosive and very damaging in the longer term.

A UK government minister, Robert Jenrick, is currently in the public eye because of a planning decision he made that favoured billionaire Richard Desmond. The two men had met at a dinner and chatted not long before the decision was made.  Jenrick is now facing more claims that another conflict of interest cropped up when he had a ministerial meeting with a “family friend” who had a financial interest in the future of a rival mining project that Jenrick was overseeing as minister.

In the procurement world, conflicts of interest can lead to bad buying when a supplier who shouldn’t win a contract does so, or is given a favourable contract, because someone on the buy-side has a vested interest in that happening. Often it is not overt bribery, but is based on relationships, nepotism, friendship, enjoyable dinners, invites to corporate events or Christmas presents. The dividing line between real corruption and poor judgement is very thin here, so we need to make sure that any conflicts are always declared and managed.

Back in my days as a procurement director, I had to ask our CEO, who had recently left Accenture, whether he still owned equity in the firm, as we were running a competition for a major contract for which Accenture was short-listed. If he did, then he couldn’t play any part in the selection process. I think he was genuinely surprised and a little offended by my question. But even if he was a cross between Jesus, Gandhi and Nelson Mandela in his personal ethics, it is how others perceive matters as much as the actual risk. And really, if others perceive a conflict, then it probably does exist.

There was a “hushed up” case (my freedom of information requests didn’t get very far) in the NHS not long ago where a small group of procurement executives gave contracts to a firm they controlled, which was also providing services to their organisation.  They may have felt those services were genuine and outside the scope of their “day jobs”. But was there a conflict of interest? Too right there was, and everyone could see that instantly.

And here’s another interesting issue. If I am involved in the decision to award a particular firm a contract, then six months later I join that firm on a huge salary, is that OK?  Many might say “no it isn’t”. But it happens all the time; this was an NHS example when an executive joined Deloitte shortly after the firm had won a large contract from his organisation.  There are of course many cases in the private sector as well as the public. 

And let’s face it, this starts from the top. The UK’s ex-chancellor George Osborne got a part-time job worth £600,000 a year for doing some pretty unspecified work for BlackRock, the world’s largest fund manager. But only months earlier, he was ultimately responsible for regulating the entire  financial services industry in the UK. Corruption? Maybe not. A retrospective conflict of interest? Absolutely.  It is the same with staff in the military who jump from managing contracts with big defence and services firms to working for those businesses.

My advice is to make sure your organisation’s HR and procurement policies make it very clear what defines a conflict of interest, and how people must act in that situation. Ensure every employee understands the rules and what they need to do.  And, by the way, “writing it down in a book” or sending a form to some admin person in HR or procurement is not a strong enough policy (just as it isn’t enough for declaring gifts or corporate hospitality).  Do it properly, then if anyone has a conflict, you can take steps to ensure they are not involved in decisions.

And of course, there is more on this in my book, Bad Buying- How Organisations Waste Billions Through Failures, Frauds and F*ck-ups, to be published in October by Penguin Business.

We’re seeing so many interesting procurement and supply chain issues during the pandemic, but focus tends to shift week by week. We’ve had the challenge of finding more ventilators, which has more or less disappeared as medics have found that such treatment isn’t advisable for many patients. Then we had global shortages of PPE (personal protective equipment) – that issue certainly hasn’t disappeared, and we’re now all very interested in how a tiny pest-control business in England could win a contract for over £100 million of PPE supply.

But there’s another “spend category” that could make £100 million contracts look trivial. According to the Guardian today (June 18th), the UK’s National Health Service is considering a huge deal with the private hospital sector to use the private facilities in order to help clear the backlog  of non-Covid treatments that re urgently needed. (The NHS has effectively taken over the private hospital sector since March, but there is evidence that many of their facilities have not been heavily used up to now).

The newspaper says that “Matt Hancock, the health secretary, and NHS bosses are pushing for a £5bn-a-year deal to treat NHS patients in private hospitals and tackle a spiralling backlog amid the coronavirus pandemic”.

However, the Treasury (the UK finance ministry) has refused to sign off the deal, and has told the health department (DHSC) to “get more detailed commitments from private firms about the number of patients who will be treated every month in return for the payments”.

Well done, the Treasury!

I’d like to think that some sensible procurement professionals are involved in those discussions, although I am surprised that those procurement experts who sit in the DHSC (and there are a few…) didn’t get everything in line before the deal went to Treasury. It does also suggest that Sir Simon Stevens, who leads the NHS, and was apparently about to announce the deal, maybe doesn’t really “get” procurement. That is something we have suspected for a while and was reinforced by his choice of a Chief Commercial Officer last year who had no procurement experience whatsoever.

In any case, throwing £5 billion at some private firms without knowing exactly what they will do for the money wouldn’t be sensible and would indeed be “Bad Buying”.  It may be that the view was to set up some sort of “cost plus” or “time and materials” arrangement with the private firms, rather than having very clear deliverables, payment based on outputs and so on. But those mechanisms, where payment to suppliers is based on their costs rather than what they actually do, has some major disadvantages. Here is a short extract from my forthcoming book, “Bad Buying – How organisations waste billions through failure, fraud and f*ck-ups” (to be published by Penguin in October). I’m talking about construction contracts here, but the principles are absolutely the same.

“How about ‘time and materials’? In that type of agreement, the builder keeps a record of all materials they buy for the project, and the time that staff – bricklayers, carpenters, labourers and the like – spend on the work. The buyer agrees to pay those actual costs, plus some sort of margin to cover overheads and profit. Traditionally, many such agreements were based on a ‘cost plus’ model. So, you might agree to pay your builders all their costs, plus 20 per cent on top.

But you can see the incentivization problem here. Not only does the firm have no incentive to buy bricks as cheaply as possible, but they actually have an incentive to spend more on material and to make the work go on as long as possible, as they recover all those  costs back, plus 20 per cent on top of that! You could put a cap on the profit / overhead element, but that doesn’t fully address the incentivization issue on the materials or labour”.

Anyway, it is right that the government takes its time and applies all the skills it has at its disposal to get these contracts right. We’ve got blasé about large amounts of money being spent through the pandemic, but this is £5 billion we’re talking about. (“A billion here, a billion there… pretty soon you’re talking real money”, as the phrase goes).

I’d also hope that best practice contract and supplier management principles are going to be adopted here too. But that’s another whole story …